Every type of investment has the potential to attract scammers, and cryptocurrencies are no exception.
The rise of digital currencies has made them valuable and sought after by investors and criminals. Once a cryptocurrency transaction is made, it is very difficult to revert. The unregulated market of these easy to liquidate and highly portable assets make them an easy target for fraud.
The 7 current most common cryptocurrency frauds are the following:
1. Giveaways on social media
This type of social media fraud requires you to send them funds in a cryptocurrency, and they promise to send back an incredible return. Giveaways like this are common on Twitter and Facebook. They are often disguised as accounts that you know and trust, and often look identical to them.
Fraudsters use fake accounts or deploy bots to respond with replies about how much money others have made and how grateful they are. These types of profiles should always be ignored because they are never legitimate. Even if a legitimate site ever hosts a giveaway, it would never request you send funds first.
2. Collapsing Ponzi schemes
Ponzi schemes somehow never cease to do the rounds, and past year was no exception. These are usually marketed as portfolio management services with guaranteed profits. Unfortunately, the returns generated are money that comes from other investors. New entrants are the only ones bringing money into the pool, and that money covers the promised “returns”. Once newcomers dwindle and cash stops coming in, the money runs out and the scheme implodes.
PlusToken is one example of a Ponzi scheme involving cryptocurrencies. Its instigators were recently sentenced to 11 years in prison for defrauding Chinese investors of over $2.25 billion in cryptocurrencies.
3. Pyramid Schemes
These are almost like Ponzi schemes, but require people to recruit members to grow the scheme. As new members are recruited, part of their contributions goes to their recruiters. Money from new recruitments trickles upwards, and older members make the most money, but the model soon loses momentum and collapses. Multi-level marketing (MLM) is also like a pyramid scheme, but participants pay for the rights to sell services or products.
4. Phishing scams
Much like phishers target customers of financial institutions, the same tactics are used to approach you for your cryptos. The phishers pretend they are from your wallet or crypto exchange provider and prompt you to follow a link through an email. Of course, everything on the email looks identical, but you are diverted to their scam site where you unknowingly enter your details, giving them the information they need.
Protect yourself by always checking the URLs, never click on suspicious links from emails, and never enter your private key.
5. Fake cryptocurrency apps
These apps are used to entice people to part with their cash. They use promotional offers, bonuses, and various forms of pressure to get you to invest. Once your cash is invested, they either charge ridiculous fees for transactions, you can’t withdraw your funds, or you find the money has just disappeared. Always research a wallet before deciding to install it on your phone, even if it on your app store list.
6. Cryptocurrency mining scams
Not all mining schemes are scams, but these are known to be bad investments. Some have even been used as fronts for Ponzi schemes. The experts warn you that cloud mining and rent-a-miner schemes should be avoided. Rather invest directly in a cryptocurrency.
7. Fake initial coin offerings (ICOs)
The huge demand for cryptocurrencies also includes buyers with limited knowledge. These people are easy for scammers to target, especially with offerings for a cryptocurrency that doesn’t exist. Also, the success of some cryptocurrencies is not mirrored in others, and some investors buy into cryptos that are unsuccessful. Every ICO should be researched before you invest in it. These usually have a white paper, introduce the team behind the project, and offer a purpose for their currency. They also publish the tech and specifics of their offering.